The difference between a nominal account and a real account has to do with the balances in the accounts at the end of the accounting year:
- The balance in a nominal account is closed at the end of the accounting year. As a result a nominal account begins each accounting year with a zero balance. Since the balance does not carry forward to the next accounting year, a nominal account is also referred to as a temporary account.
- The balance in a real account is not closed at the end of the accounting year. Instead, a real account begins each accounting year with its balance from the end of the previous year. Because the end-of-the-year balance is carried forward to the next accounting year, a real account is also known as a permanent account.
The nominal accounts are almost always the income statement accounts such as the accounts for recording revenues, expenses, gains, and losses. When the income statement accounts are closed at the end of the accounting year (perhaps through an income summary account) the net amount will ultimately end up in a balance sheet equity account such as the proprietor's capital account or the corporation's retained earnings account.
The real accounts are the balance sheet accounts such as the accounts for recording assets, liabilities, and the owner's (or stockholders') equity. However, the sole proprietor's drawing account, which is reported on the balance sheet during the year, is a temporary account because it is closed directly to the owner's capital account at the end of the year.